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Fed's Lockhart gives cautious backing to more QE cuts

Dennis Lockhart, President, Federal Reserve Bank of Atlanta, takes part in a panel discussion titled "Twist and Shout: The Limits of U.S. Monetary Policy" at the Milken Institute Global Conference in Beverly Hills, California May 1, 2012. REUTERS/Danny Moloshok

By Karen Jacobs

ATLANTA (Reuters) - A top U.S. central banker on Monday cautiously endorsed further cuts to a stimulative bond-buying program, warning the labor market has not yet healed and that there are worrisome signs of disinflation in the economy.

Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, also suggested the central bank should clarify its future plans for raising interest rates now that U.S. unemployment has dropped to 6.7 percent - close to the Fed's stated threshold of 6.5 percent for considering tighter policy.

In a speech on what 2014 may hold for the economy, he said "very accommodative" monetary policy remains appropriate despite his predictions for a pick-up in economic growth and a gradual rise in inflation this year.

"If all goes as expected, there is a policy transition under way from a QE world, so to speak, to a post-QE world," he said using the initials for the Fed's bond-buying program, known as quantitative easing.

But "both the employment picture and the inflation state of affairs have worrisome aspects," he added in remarks to the Rotary Club of Atlanta.

In a nod to better jobs growth, the Fed last month announced it would trim its asset purchases to $75 billion per month, from $85 billion, starting in January. Those purchases, along with near zero interest rates, are meant to spur investment and spending that will boost hiring and growth.

Chairman Ben Bernanke has suggested the Fed would take similar, measured steps to wind down the purchases throughout the year - which most economists have taken to mean agreeing to further taper its bond buying in $10 billion increments at each policy meeting.

Lockhart, a centrist at the central bank who does not have a vote on monetary policy this year, predicted 2.5 to 3.0 percent gross domestic product growth this year, up a bit from 2013. If that plays out, he said he would support "similar tapering steps over the course of this year."

U.S. unemployment sharply dropped to 6.7 percent in December from 7.0 percent. But "the labor market is not as healthy as the improved unemployment rate might indicate," Lockhart said. "The unemployment rate drop may overstate progress achieved."

Highlighting weak wage growth and a high degree of labor market dropouts, he added there remained a "substantial employment gap" that could be helped by easy Fed policies.

As for inflation, Lockhart said it "seems disconnected from the recent growth momentum," and warned that "continued disinflation could pose risks to economic performance."

The Fed has said it will keep rates at rock bottom well past the time unemployment falls below 6.5 percent, especially if inflation remains below its 2 percent target.

The drop in joblessness poses a problem for the Fed's so-called forward guidance, Lockhart told reporters afterward.

"I think the 6.5 percent (threshold) is not serving as well now as it may have served earlier when we were a fair distance away..." he said, "and it now requires substantially more explanation and for that matter more interpretation of what the number actually is signaling."

Lockhart did not advocate lowering the threshold, as have some other Fed officials.

(Reporting by Karen Jacobs; Writing by Jonathan Spicer; Editing by Andrea Ricci and Alden Bentley)